Labour must stop taking the blame for UK’s economic woes

Yes, Labour placed too much faith in the City when it was in power, but it was not responsible for the last recession – or the new one now looming over us

When facing a freefalling economy in 2008-9 the Brown/Darling team in Downing Street, and the Bank of England, which was in even closer physical proximity to the financial crisis, decided to throw everything they could muster into stabilising the situation, including the kitchen sink.

There were many uneasy moments, and Alistair Darling has already recorded his criticisms of Gordon Brown and the governor of the Bank of England for posterity. Nevertheless, he gave Brown full credit for playing a key role in the G20 rescue operation of April 2009, saying that it would not have happened without the prime minister’s dedication to the task. Other world leaders also praised Brown.

When the Conservative-dominated coalition arrived on the scene in summer 2010, unlike the Obama administration, it took an immediate decision to begin to withdraw the stimulus that had kept the show on the road – and which, indeed, had contributed to a burgeoning recovery.

The position now is that the US economy, for all the doubts the widely respected economist Paul Krugman had about the size of the stimulus, is indeed recovering, albeit slowly. Why, the recovery has received Krugman’s tentative blessing.

The same cannot be said for the UK where, as predicted by the shadow chancellor, Ed Balls, the economy is suffering from the premature withdrawal of the fiscal stimulus.

Now, it is always important to try to see the other side’s point of view. As far as I can work out, the respectable case for withdrawal is that it was obvious that at some stage the government would need to tighten policy, in response to the widespread belief that the fiscal situation was unsustainable in the medium term. As one veteran policy adviser put it: “There was a need to act early, in order to avoid being forced by the markets to do more than was really necessary.”

This adviser had no political axe to grind. But the new government did. George Osborne, whom I continue to regard as the most dangerous chancellor I have known, took the cynical political calculation that it would pay to produce maximum pain in the early days, in the hope that the sunny uplands would be sighted in time for a 2015 election.

He took the measures, but they did not produce the improvement in the finances on which he placed a very public bet. Ed Balls was right, but has so far received little credit for it. In my opinion the opposition needs to bear in mind the advice of Corporal Jones from Dad’s Army: “Don’t panic”. Despite the soundness of their judgment since the 2010 election, Labour leaders are being blamed for placing so much faith in the City of London to provide the revenue to balance the books. The banking crisis dealt with that.

Labour was not responsible for the Great Recession, and was doing its best to emerge from it. If Labour wins in 2015 – stranger things have happened – it is generally assumed that it will have a tough time. But my impression from talking to people almost everywhere I go is that, while Labour leaders are right to avoid making too many commitments at this stage, statements about not reversing cuts they have opposed make people wonder why they should vote Labour at all.

Labour should stick to its guns. I cannot see the coalition’s remarkable popular support lasting. Indeed, if the government goes ahead with its plans to all but privatise the NHS, we may have seen nothing yet.

However, there also appears to be rising panic in the coalition’s ranks. The Lib Dems must have consciences as guilty as anything ever thought up by the Jesuits over their commitment to the chancellor’s policy. Clearly Nick Clegg would like a rather different budget from that being planned.

For reasons not difficult to fathom, the relatively poor have a higher “propensity to consume” (a favourite piece of economists’ jargon!) than the better-off. So, to the extent that the chancellor listens to Clegg on tax thresholds, there may be a minor alleviation of the fiscal squeeze. But the impact will be limited because the very poor, who do not pay income tax, are being hit by the frontal attack on welfare.

The evidence seems to mount that the stimulus in this country was withdrawn too soon. Even the credit rating agencies are now concerned about excessive austerity. Having boxed himself in, the chancellor has had to resort to strange partners in order to encourage investment. I never thought I would see the day when a Conservative chancellor would approach a communist Chinese sovereign wealth fund to invest in Britain’s infrastructure.

Of course, Britain once had its own chance to build a sovereign wealth fund, with the endowment of North Sea oil and gas in the 1970s. But in the end short-term considerations dominated, both under Labour and Conservative governments.

The story is told in The Official History of North Sea Oil and Gas by the economist Alex Kemp (Routledge), which sounds like a dry history, but is brilliantly written. Kemp notes: “The role of an oil fund as an instrument to produce sustainable income and intergenerational equity … deserved more attention than it received.”

I’ll say! As one member of Thatcher’s cabinet cynically observed: “We used North Sea revenues to finance unemployment.”